Some people say the Markets in Financial Instruments Directive II (MiFID II) effectively prohibits investors from buying ETFs that aren't domiciled in their country of residence. Is that true? I'm in the EU and it's not illegal for me to buy ETFs domiciled in other countries now. In fact, there're no ETFs domiciled in my country, so I'm a bit worried that I might not be able to buy any ETFs starting from January 3. What's your take on the new European legislation? I know this is a US-centric site, so my apologies if this topic doesn't belong here. Thank you.

It is true, I received a message from my broker that nobody will be able to purchase ETFs that don't offer documentation with (in my case) the Dutch language.
Apparently part of mifid ii is that companies that offer ETF must offer documentation about the ETF in the native language where the ETF is being sold.

I mailed Vanguard and got a response that states that US based ETFs will no longer be available to non-US folks
Because those ETFs don't have a "European passport" whatever that means..

Only ETFs that have an "Ireland domicile " will be available to EU folks which sucks because of the dividend tax. (foreign withholding tax).
With one stroke of a pen, Vanguard funds are no longer an attractive option for people in the EU

Netherlands and US have a tax treaty.
US dividends have 30% tax. but if you filled in the correct paperwork you are taxed (only) 15% dividendtax. That 15% dividendtax can then be put on your income tax form and be redeemed because we already pay 1.2% wealth tax. So with VTI-VXUS dividend leakage is 0%.

Ireland ETFs pay dividend taxes to different countries that we as humans can't redeem as far as I know.

I mailed Vanguard and got a response that states that US based ETFs will no longer be available to non-US folks
Because those ETFs don't have a "European passport" whatever that means..

Only ETFs that have an "Ireland domicile " will be available to EU folks which sucks because of the dividend tax. (foreign withholding tax).
With one stroke of a pen, Vanguard funds are no longer an attractive option for people in the EU

Hi. I realize we are not in the EU much longer, but for a UK taxpayer an Irish domiciled ETF works fine?

"passporting" is the financial term that means a product legal in one EU country is legal in all the 28 (27 when we exit). What happens post Brexit is anyone's guess but it's not a worry for non UK investors.

I think you should send Aunt May a letter so she can put it on her todo list during the negotiations in Brussels
If Ireland sucks for the rest of Europe can't imagine it won't for the UK..

It's already on the to do list - remember our financial services industry is 10% of the economy. Philip Hammond (Chancellor) is their route in.

I know the Germans call Merkel "Mother" but I've never heard "Aunt May" (Spiderman fans are not so common, here ). Mrs May (note her husband works for Capital International, the Los Angeles HQ'd fund manager).

The Ireland position won't change post Brexit, I am pretty sure. It works now, we won't change our regulatory laws or our tax laws. Although some form of capital taxation is a real possibility if we get a change in government.

US dividends have 30% tax. but if you filled in the correct paperwork you are taxed (only) 15% dividendtax. That 15% dividendtax can then be put on your income tax form and be redeemed because we already pay 1.2% wealth tax. So with VTI-VXUS dividend leakage is 0%. Ireland ETFs pay dividend taxes to different countries that we as humans can't redeem as far as I know.

Yes. For non-US investors who live in countries where the dividend tax rate (or equivalent) is higher than the US rate on dividends -- standard is 30% but this reduces to 15% for most treaty countries, and 10% for a lucky few -- the US tax on US domiciled ETFs at the investor level is usually directly creditable, but any US tax paid internally by a (say) Ireland domiciled ETF is not. It is effectively the difference between a tax credit and a tax deduction.

It is too early to say whether MiFID II will have any effect in terms of protecting the large numbers of non-US investors, who are not in the above group, from accidentally buying US domiciled ETFs that would for them be both inefficient on dividend taxes when compared with Ireland domiciled equivalents and also potential wealth-destroying US estate tax traps. That at least would be a balancing plus-point to this new piece of regulatory nonsense.

The one set of investors I can see that will be harmed by it will be US citizens and green card holders living in the EU. For these people, non-US domiciled funds and ETFs represent a likely US tax death-sentence, and their current major workround is often to buy US domiciled funds inside their EU brokerage accounts. That route may now be closed. As a UK resident, I am once again glad that I am not a US citizen or green card holder.

Finally, worth adding that MiFID II doesn't yet cover UCITS funds and ETFs, so the majority (all?) of EU domiciled funds will still be available to any EU investors. It's just non-UCITS funds that don't -- and don't intend to -- meet the new regulation that are being restricted. There is a long-standing and analogous situation in the US, where non-SEC regulated funds and ETFs (such as UCITS ones) are not strictly available to US investors either. A cynic might view MiFID II as 'retaliatory protectionism'.

Yes. For non-US investors who live in countries where the dividend tax rate (or equivalent) is higher than the US rate on dividends -- standard is 30% but this reduces to 15% for most treaty countries, and 10% for a lucky few -- the US tax on US domiciled ETFs at the investor level is usually directly creditable, but any US tax paid internally by a (say) Ireland domiciled ETF is not. It is effectively the difference between a tax credit and a tax deduction.

It is too early to say whether MIFID II will have any effect in terms of protecting the large numbers of non-US investors, who are not in the above group, from accidentally buying US domiciled ETFs that would for them be both inefficient on dividend taxes when compared with Ireland domiciled equivalents and also potential wealth-destroying US estate tax traps. That at least would be a balancing plus-point to this new piece of regulatory nonsense.

The one set of investors I can see that will be harmed by it will be US citizens and green card holders living in the EU. For these people, non-US domiciled funds and ETFs represent a likely US tax death-sentence, and their current major workround is often to buy US domiciled funds inside their EU brokerage accounts. That route may now be closed. As a UK resident, I am once again glad that I am not a US citizen or green card holder.

I'm reading and trying to understand whether you agree with me or not

When we talk about Vanguard ETFs (to keep it simple for me )

- the VTI/VXUS combo offers an tax credit a EU citizen can redeem
- the VWRL (Ireland based ETFs) suffer from a internal tax deduction that will reduce profits.

So if the MIFID II forces EU citizens away from US based ETFs does that not mean that all EU countries that have a tax treaty with the US which is less then 30% automatically be hit by MIFID II ?

Well, the tax rules of the assorted countries vary considerably, so I'm not sure we can conclude 'all'. And a country without a treaty but with a dividend tax rate of more than 30% and which allows direct tax credits is also affected. So having or not having a treaty isn't a requirement for being drawn into this; it's just that treaty rates make it more likely that US tax will be below local rates. And many investors even in treaty countries don't want the hassles of investing in 'offshore' funds, particularly if their local government is prone to punitively taxing them (the UK to an extent, but for one of the worst examples of punitive taxes on 'offshore' funds, see the US PFIC rules).

The relative tax drag on Ireland domiciled funds will vary depending on the proportion of US stocks it holds. The worst case is probably 85% of 15% of a 3% or so dividend, so perhaps 0.38% or so a year. The best case will be nothing, where a fund holds no US stocks at all. And surrounding all of this will be currency effects from all the countries that make up the assets in the ETF, any differences in accounting or valuation timing points, capital gains distribution distortions (US funds must distribute realised gains, non-US ones may retain them), and any number of other weird things that frustrate a direct comparison.

Netherlands and US have a tax treaty.
US dividends have 30% tax. but if you filled in the correct paperwork you are taxed (only) 15% dividendtax. That 15% dividendtax can then be put on your income tax form and be redeemed because we already pay 1.2% wealth tax. So with VTI-VXUS dividend leakage is 0%.

Ireland ETFs pay dividend taxes to different countries that we as humans can't redeem as far as I know.

pecunia,

Are you sure about VXUS? The ETF holds non-U.S. company stocks, which tend to be subject to (treaty-regulated) dividend withholding tax rates in their respective countries of domicile. So, VXUS receives non-U.S. dividend net of foreign tax on dividends. What the paying agent withholds on disbursement to you is on top of those non-U.S. dividend withholdings, so you typically get taxed twice to receive 0.85x0.85=0.7225 of your non-U.S. dividend, i.e. your effective tax rate is about 28 percent.

If you can reclaim the 15 percent withheld by the paying agent on disbursement thanks to a tax treaty, then you're subject to one "level" of tax only, i.e. you only "pay" non-U.S. tax on dividends from non-U.S. corporations, and your effective tax rate is 15 percent.

I think you're right about VTI though. I don't think U.S. corporations withhold dividend tax on disbursement to U.S. stockholders/mutual funds/ETFs.

[EDIT: Could you please elaborate on the wealth tax issue? How do you claim back the 15 percent withheld by the paying agent on disbursement?]

Micks is a member on this forum, he is one of the authors of the wikie page on The Netherlands.
Let's see if I can highlight this thread to him.

Micks wrote:

That worked . Full disclosure: the blog pecunia is referencing is mine as well.

VXUS does indeed have 'internal' dividend taxes which is deducted from the dividends it receives. Rates differ per country, but as in the table it was about 6% per year, which comes at 0.12% in yearly taxes at a 2% dividend yield. The US taxes dividends at a 30% rate, so the dividends that VXUS issue are taxed at 30% as well. The Netherlands has a tax treaty with the US reducing this US dividend withholding tax to 15% and as a Dutch taxpayer you can settle this non-Dutch tax with 'wealth tax' (which you pay if your wealth reaches a certain threshold, otherwise you cannot settle this 15% US tax). Hope this clarifies a bit.

As for the PRIIPS regulation, I found this article which indicates that funds need to publish a KID if they are intended to be sold to people in Europe (EEA more specifically). US ETFs are not intended for sale in the EU, which is why they are not passported as such by Vanguard. It also makes me wonder if then, Vanguard's US ETFs even have to comply with EU laws if they are not intended for sale here. A broker is in my view not the one offering/selling the funds, but just an intermediary, so has no obligation to prevent you from buying ETFs without a KID. Also noteworthy is that the broker that banned buying US ETFs is alone in the Netherlands, I have yet to hear of other brokers in the Netherlands removing US ETFs from their platforms. Still, I am far from an expert on these matters, so I guess time will tell.

It is true, I received a message from my broker that nobody will be able to purchase ETFs that don't offer documentation with (in my case) the Dutch language.
Apparently part of mifid ii is that companies that offer ETF must offer documentation about the ETF in the native language where the ETF is being sold.

I don't know what Vanguard is doing to mitigate this.

If it only would be the language, providing a translation should not be that difficult.

Are you sure about VXUS? The ETF holds non-U.S. company stocks, which tend to be subject to (treaty-regulated) dividend withholding tax rates in their respective countries of domicile. So, VXUS receives non-U.S. dividend net of foreign tax on dividends. What the paying agent withholds on disbursement to you is on top of those non-U.S. dividend withholdings, so you typically get taxed twice to receive 0.85x0.85=0.7225 of your non-U.S. dividend, i.e. your effective tax rate is about 28 percent.

If you can reclaim the 15 percent withheld by the paying agent on disbursement thanks to a tax treaty, then you're subject to one "level" of tax only, i.e. you only "pay" non-U.S. tax on dividends from non-U.S. corporations, and your effective tax rate is 15 percent.

I think you're right about VTI though. I don't think U.S. corporations withhold dividend tax on disbursement to U.S. stockholders/mutual funds/ETFs.

[EDIT: Could you please elaborate on the wealth tax issue? How do you claim back the 15 percent withheld by the paying agent on disbursement?]

That worked . Full disclosure: the blog pecunia is referencing is mine as well.

VXUS does indeed have 'internal' dividend taxes which is deducted from the dividends it receives. Rates differ per country, but as in the table it was about 6% per year, which comes at 0.12% in yearly taxes at a 2% dividend yield. The US taxes dividends at a 30% rate, so the dividends that VXUS issue are taxed at 30% as well. The Netherlands has a tax treaty with the US reducing this US dividend withholding tax to 15% and as a Dutch taxpayer you can settle this non-Dutch tax with 'wealth tax' (which you pay if your wealth reaches a certain threshold, otherwise you cannot settle this 15% US tax). Hope this clarifies a bit.

As for the PRIIPS regulation, I found this article which indicates that funds need to publish a KID if they are intended to be sold to people in Europe (EEA more specifically). US ETFs are not intended for sale in the EU, which is why they are not passported as such by Vanguard. It also makes me wonder if then, Vanguard's US ETFs even have to comply with EU laws if they are not intended for sale here. A broker is in my view not the one offering/selling the funds, but just an intermediary, so has no obligation to prevent you from buying ETFs without a KID. Also noteworthy is that the broker that banned buying US ETFs is alone in the Netherlands, I have yet to hear of other brokers in the Netherlands removing US ETFs from their platforms. Still, I am far from an expert on these matters, so I guess time will tell.

Nothing more to say, Micks is the man!

Last edited by pecunia on Thu Jan 18, 2018 3:51 pm, edited 1 time in total.

Micks wrote:
Also noteworthy is that the broker that banned buying US ETFs is alone in the Netherlands, I have yet to hear of other brokers in the Netherlands removing US ETFs from their platforms. Still, I am far from an expert on these matters, so I guess time will tell.

Although I am based in Denmark, Nordnet bank (which is favored by many Scandinavian investors) has also decided to remove access to US-domiciled ETFs from its list of products.

"The intelligent investor is a realist who sells to optimists and buys from pessimists" - Benjamin Graham

Seems increasingly US ETF's are including wording something to the effect 'not to be marketed to EEA residents' so specifically the EU (UK I believe will drop out of the EEA post Brexit). Perhaps the motivation is for a EU wide transactions tax as part of its intended convergence (centralized tax and spend). If so I wonder what will happen in the case of having to dump holdings that have accumulated large capital gains that you otherwise might have continued to hold for tax deferral purposes.

All up in the air, planning for the worst, hoping for the best (IME US ETF's have more breadth/depth are more liquid and cost effective).

The relative tax drag on Ireland domiciled funds will vary depending on the proportion of US stocks it holds. The worst case is probably 85% of 15% of a 3% or so dividend, so perhaps 0.38% or so a year. The best case will be nothing, where a fund holds no US stocks at all.

A withholding tax on dividends paid to foreign stockholders is not unique to the US.* There are only a couple of dozen countries that do not have withholding taxes. Any broadly diversified international fund will almost certainly have some withholding tax drag, though working out how much would require digging into the tax systems and treaties of the relevant countries. The US is also probably not the worst case, since some countries have higher rates, and smaller countries are less likely to have tax treaties with each other.

Note that those figures exclude where tax treaties might apply. For instance as a UK investor the 30% US withholding tax rate is reduced to 15% providing you're known to the US (register a W-8BEN every couple of years).

The US is also probably not the worst case, since some countries have higher rates

Pretty much is up there at the top, at least from a dividends perspective. Chile (35%) is higher, as is France in 'unfriendly' cases (75%, but otherwise 30%).

I contacted a Dutch broker called Degiro, which operates in Ireland, and they said:
" Due to the new regulation, we cannot provide the products unless we have the relevant KIID documentation.

These are issued by the provider. We are currently in the process of obtaining these documents and cannot provide a timeline for when this will be complete.
"

You should take a look at Lynx, Dutch IB reseller which still gives the opportunity to buy US based funds.
PM me if you want 100 EUR "transactie-tegoed" on top of the current deal that they are having..